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Virginia’s ‘You Choose’ Sale Shows Popularity of Build Americas

Build America Bonds showed why they’re the fastest-growing part of the municipal market in a $492.7 million sale yesterday by Virginia’s Commonwealth Transportation Board, which let buyers choose between the taxable debt and tax-exempts.

Goldman Sachs Group Inc. took $407.2 million of Build Americas through competitive bidding, more than four times the $85.5 million of tax-exempts it chose. The sale helped push Build America issuance past $100 billion for the 13 months since the bonds were first sold.

The option to bid for different types of debt in the same sale “seems to be the pattern that’s developing,” said Anthony Shields, a principal in the public-finance department at Williams Capital Group in New York. “I think it’s going to add a whole new dimension to the muni-bond market, it’s going to change things dramatically.”

Giving buyers a choice means they can tailor bids to market conditions, said Janet Lee, senior managing director at New York-based Public Resources Advisory Group, the Virginia Transportation Board’s financial adviser.

“With the volatility in the markets, things change from day to day pretty fast,” she said. “With this option, at the time of the sale, the bidders can put in their best bid based on the best combination that they see at that time.”

Waning Concern

The Virginia sale came as Treasuries fell on waning concern over European debt defaults. The yield on the U.S. 10-year note rose as much as 6 basis points to 3.58 percent as its appeal as a refuge from the crisis ebbed. The yield fell to a five-month low last week amid doubts about a European rescue of highly indebted nations.

Top-rated 10-year municipal yields held at 3.18 percent for a third day yesterday, a one-week high, according to a daily survey by Municipal Market Advisors. A basis point is 0.01 percentage point.

Corporate borrowers worldwide sold 62 percent less debt this month than in April and 83 percent less than the average for the past year, according to data compiled by Bloomberg. The extra yield investors demand to own company instead of government debt soared last week to the highest in more than four months.

The Metropolitan Washington Airports Authority postponed a $650 million negotiated sale of taxable and tax-exempt bonds this week, citing the market volatility.

“Events last week made spreads jump 30 to 40 basis points,” said Tom Kozlik, municipal credit analyst at Philadelphia-based Janney Montgomery Scott. “Now that things have started to calm down issuers that hung in there are executing well.”

First of Three

Virginia’s sale was the first of three by the transportation board that will total $3 billion. The securities are rated Aa1 by Moody’s Investors Service and AA+ by Standard & Poor’s and Fitch Ratings, the second-highest grade by all three. Tax-exempts will mature from 2011 through 2016. The Build Americas will mature serially from 2017 through 2024 and in 2035.

The tax-exempt bonds maturing in 2014 were priced to yield 1.55 percent, 20 basis points less than AA+ rated four-year general obligations at 1.75 percent, according to Bloomberg Fair Value data. Taxables maturing in 2035 yield 5.35 percent, 58 basis points lower than the 5.93 percent average of the Wells Fargo Build America Index.

A 10-year taxable priced to yield 4.31 percent, 38 basis points lower than AA-rated U.S. corporate debt maturing in seven to 10 years yielding about 4.69 percent, according to a Bank of America Merrill Lynch index.

Favorable Spreads

“The state did themselves a favor by coming competitively,” said Shields, referring to the practice of seeking public bids for bonds rather than setting prices in private talks with banks. “If this had come negotiated, it would have gotten much wider spreads.”

Build Americas, which accounted for 26 percent of municipal sales in 2010 through yesterday, reduce state and local expense because the federal government rebates 35 percent of the interest cost. Their taxable yield expands the $2.8 trillion municipal market to investors who don’t buy traditional tax-exempt debt.

Build America Bonds have returned 8.2 percent this year, according to a Bank of America Merrill Lynch index. That’s more than three times the gain of the municipal market, according to BofA Merrill Lynch’s Municipal Master Index.

Six competitive sales out of 90 scheduled for next week have the dual-bid option. Mesa, Arizona’s, $30 million sale is the largest.

Smaller Firms

Including Build America Bonds in a competitive sale gives smaller firms access to the bonds, said Shields. It also allows issuers to get competitive yields throughout maturities, Kozlik said.

“You’re going to see less tax-exempt issuance on the long end and it’s just going to be BABs,” said Shields. “In the short end, where mom and pop cares, there’s going to be availability.”

In Virginia Transportation’s last offering, on Oct. 21, Build Americas accounted for $61 million of the $72.2 million sale, with tax-exempts making up the rest. The next Virginia offering will be in 2011, said Reta Busher, chief financial officer for the board in Richmond.

Following are descriptions of pending sales of municipal bonds in the U.S.:

SEATTLE CITY LIGHT, a municipally owned utility that provides power to about 1 million people, will sell about $811 million in electric revenue bonds today to refinance existing debt and fund capital improvements. The sale comes in three issues, with $590 million in tax-exempts, $207.7 million in Build Americas and $13.3 million in taxable Recovery Zone Economic Development bonds. Citigroup will lead underwriters in marketing the securities, which are rated Aa2 by Moody’s, third-highest, and AA- by S&P, one level lower. (Updated May 13)

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY, which helps the most populous U.S. city raise funds for capital projects, plans to sell $1.14 billion in taxable and tax-exempt debt as soon as next week for refinancing and school renovation and construction. Build America Bonds comprise two issues totaling $420 million. Qualified School Construction notes, which come with a 100 percent U.S. subsidy on borrowing costs, are $250 million, with another $90 million in traditional taxables. Tax-exempt issuance makes up the remaining $380 million. Underwriters led by Bank of America Merrill Lynch will market the securities, rated AAA by S&P, its highest grade, and AA+ by Fitch and Aa1 by Moody’s, their second-highest ratings. (Added May 13)

MASSACHUSETTS DEPARTMENT OF TRANSPORTATION, created last year in a merger of state agencies, plans to sell about $1.1 billion in fixed-rated bonds and variable-rate demand obligations as early as next week to refinance existing debt. The agency will issue about $207.7 million in VDROs to match a swap agreement with UBS from 2008, with the remainder coming as fixed-rate to refinance bonds from 1997, preliminary offering documents show. The bonds were originally sold by the Massachusetts Turnpike Authority to finance Boston’s $15 billion “Big Dig,” the largest public works project in U.S. history. The subordinated bonds are secured by turnpike tolls and other revenue, such as state aid, and were rated AA-, fourth-highest, by Fitch on March 16. Citigroup will market the debt to investors. (Updated May 13)

COLUMBUS-FRANKLIN COUNTY FINANCE AUTHORITY, home to Ohio’s capital, plans to sell $158 million in taxable revenue bonds next week. The securities will mature semiannually from February 2015 through August 2021. Proceeds from the issue, rated AA- by S&P, will be deposited into a reserve fund and will help finance future capital needs, according to preliminary offering documents. RBC Capital Markets will market the issue to investors. (Added May 12)

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